The Rogue Trader Story For Crypto | What to Learn from Nick Leeson on Overtrading, Leveraging and Taking Risks

It is often said that traders should not continue to enter the market after taking several losses in a row. Similarly, experienced managers talk about the dangers of averaging those losses and why elaborating a risk management plan is crucial in trading markets.

Even when a trader enjoys a profitable strategy for a long time, it is not exempt from seasonal changes in the market that could damage the performance. In cryptocurrency markets, these changes tend to be prominent due to the inherent volatility moving them.

There was a trader who ignored all these factors and ended up not only destroying institutional capital but also going to jail. He tried to implement a doubling strategy, which failed enormously. After all, as Will Roger would state: “The quickest way to double your money is to fold the bills and put them back in your pocket.”

Within an index, a bank, a trader, and over 1 billion dollars in losses, this article explores the story of Nick Leeson, The Rogue Trader.

The Rogue Trader: How Did It All Start?

In 1992, a young financial trader was creating a furor in the Asian market, accumulating thunderous profits for the most important bank in England: Barings Bank. At the age of 25, Nick Leeson was in charge of trading derivative contracts on the futures market in Singapore for the English bank. The Nikkei, the main index in Tokyo, was his preferred instrument.

During the first year, he managed to reap 10 million pounds in net profits for the Barings bank. This excellent performance brought him not only a large bonus and a 6-figure salary but also gave him a good reputation within the financial industry, earning the trust of his bosses and absolute control over his subsequent operations in the market.

Leeson maintained this prestigious image as he continued to generate profits for himself and the financial institution. He became confident and developed strategies that continued to yield positive results. However, the error of an employee and co-worker would lead to the adoption of tricks and bad habits in a desperate attempt to hide the error to avoid her dismissal.

A Mistake Of Thousands Of Pounds That Ended Up Costing Millions

Due to the trust he had earned from the members of the bank, Leeson was audited just once a month and, therefore, had more power over his operations most of the time. He lacked a supervisor to ensure that he did not break the rules or engage in unprofessional practices, which allowed him to use an external account named "88888" to try to reverse his trading losses.

Initially, he used the account to hide his partner's mistake, which in total accumulated a loss of around 10,000 to 20,000 pounds, but then he began to hide his own losses as well. $1.7 million would be the figure that would mark the point of no return in the use of this risky strategy with which he entered into a spiral of deception, illegal practices, and catastrophic losses.

By September 1992, this unofficial account recorded a total loss of 5 million dollars. Leeson realized that if he wanted to keep his job, he had to continue hiding these negative figures and try to reverse them toward a positive balance.

Natural Disaster Breaks Financial Disaster

From 1993 to 1995, Leeson kept the account secret, tried to reverse losses through trading habits that were closer to gambling than an investment plan, and slowly chipped away at the bank's capital until it accounted for 40% of the bank's total trading volume.

His new strategy was that every time he incurred a loss, he would double the size of his position on the next trade, and by the end of 1994, the account ended up with a negative balance of more than $200 million.

What to Learn from Nick Leeson For Crypto And What Not To Do When Trading

Initially, Nick Leeson implemented an arbitrage strategy to capitalize on price discrepancies between different markets. He succeeded with this method, considered a low-risk strategy.

In combination with the arbitrage method, he implemented another approach based on identifying swing opportunities. While the arbitrage comprised an intraday process, the other was a mid-term strategy, where he would hold high-leveraged positions for days and weeks.

Beyond the mistake his co-worker made, his two profitable strategies were affected by his own behavior, from which we can point out the following:

• Leveraging and overtrading.
• Improvised adaptation to market condition changes.
• Taking risks with poor management.

Leveraging And Overtrading

Nick Leeson involved his trading in a spiral of doubling bets, essentially trying to implement a martingale strategy.

In addition, he was averaging losses, a practice highly avoided by legendary traders like Richard Dennis or Paul Tudor Jones.

Martingale, along with leverage and overtrading, is a guaranteed recipe for ruining an account.

Market Condition Changes

The stress generated by averaging losses undermined his awareness of the markets, which are constantly changing.

A natural disaster was the catalyst that soared the volatility, sinking the rest of his account.

In our current times, geopolitical events are the more significant catalysts affecting volatility across all financial markets, including cryptocurrencies.

Taking Risks With Poor Management

The high risks associated with averaging losses are an absolute aspect of poor management.

Risk management is paramount in the crypto context. Trying to avoid a small loss can directly lead to a larger loss and, therefore, bring your balance to zero.

Well-prepared risk management plans consider all possibilities of loss as a methodological process for coping with the market over the long term.

Conclusion

Nick Leeson's story and failed strategy serve as a warning tale to those traders who often fall into overtrading, leveraging, and risk traps, sabotaging themself in the process of capitalizing over the market price movements. This story emphasizes the importance of risk management, ethical behavior, and transparency in financial trading.

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